It's Time to Embrace "Lite" Restructuring Plans

In the throes of COVID-19, the UK's Corporate Insolvency and Governance Act 2020 emerged as a beacon of hope for businesses grappling with unprecedented challenges. While giants like Virgin Atlantic and Pizza Express navigated through the storm with Restructuring Plans, smaller enterprises seemed to tread familiar paths, missing out on what could potentially be a lifeline, and saddling themselves with more debt. 

The legislation does not limit the size or complexity of the business that should use Restructuring Plans, but it became practice that only the largest cases were using the procedure.

At Addleshaw Goddard, we're pioneering a shift in mindset with our recent involvement in the Restructuring Plan for SIR Joinery Ltd, a small Aberdeenshire construction firm. 

SIR Joinery

SIR Joinery was a small construction business based in Aberdeenshire. It had around 20 employees and had traded profitably for a number of years before entering into a period of financial distress. At the time of considering its options, it had 4 main categories of creditors: (i) HMRC, (ii) Landlord Arrears, (iii) Trade Creditors and (iv) Unsecured Creditors (mainly shareholders loans). It is worth noting that in Scotland on an insolvency, Landlords have a security right known as hypothec for rent arrears, which is the reason they were not in the Unsecured Creditors class.

Under the Restructuring Plan it was proposed that:

(a) HMRC would receive a repayment of 50% of the total sums outstanding across 36 months from the Effective Date, in comparison to the proposed repayment of 17% under the Relevant Alternative (an Administration).

(b) the Landlord would receive 30% of the total sums outstanding via repayments over 36 months from the Effective Date, as compared to 25% under the Relevant Alternative. 

(c) the Trade Creditors would receive 90% over a period of 9 months from the Effective Date, as compared to no return under the Relevant Alternative.

(d) the Unsecured Creditors, would have their debts compromised, to receive a return of 30% over a period of 36 months from the Effective Date, as compared to no return under the Relevant Alternative.

As the Company was a construction business Trade Creditors needed to be treated differently to unsecured creditors. The Trade Creditors were critical to the ongoing business. The continued co-operation in respect of upcoming projects was essential to the Company's restructure. In addition, due to rights of set off under construction contracts trade creditors require special consideration. The Company had a very limited geographic pool of suppliers and subcontractors. If these creditors did not work with the Company on an ongoing basis this would have a very detrimental impact on its ability to complete both new and existing projects. The alternative was to exclude Trade Creditors from the Plan but to promote fairness across the Plan a small discount was proposed.

Streamlining the Process

In Scotland no Practice Statement Letter is required and given the modest nature of the business no letter was prepared in order to save costs.

Although no practice statement was required, the Company still tried to engage with Creditors in order to explain the Plan and the process on a practical level. As one of the key creditors, HMRC were contacted, and although initially were prepared to withdraw its enforcement action to consider the proposal, ultimately they did not engage in any discussion around their position. 

At the Convening Hearing orders were granted to proceed with the Restructuring Plan Meetings, advertise the Plan Meetings for each of the classes and appoint a Court Reporter. 

In Scotland, the practice for Part 26 Schemes is for the applicant to appoint a Court Reporter (who, if approved by the Court, is a Court Appointed professional (accountant or solicitor) in private practice).  Their role is determined by the Judge but is to report to the Court that the requirements of Part 26A and the legal process have been properly followed.  The practical benefit is that this can avoid the need for the applicant to have to present formal evidence, and to test the evidence by formal examination.  However, the costs of a Court Reporter are met by the Company, so it is an additional costs burden for companies that is not a feature of restructuring plan procedure in England and Wales.

In order to save costs, we requested that the Court dispense with the need for a Court Reporter, but the Court requested that they were appointed.  However, the Court recognised the need for a cost-efficient process and proportionate to a small business and attempted to set out a limited remit of the Court Reporter in this case.  

Timescales

For a straight forward Lite Restructuring Plan, strictly speaking it should be possible to complete a Restructuring Plan within approximately 4 weeks. As the process is still relatively unknown and professional advisors are still getting comfortable with the processes it is taking longer. In addition we had the festive period at a key point during the Plan which also contributed to a delay in the process, but we believe that as practice develops 4 weeks will become realistic for a Lite Restructuring Plan.

Why did the Plan not proceed?

Despite requests for comments or engagement on the Plan, HMRC provided no substantive response and simply issued a Proxy Vote against the Plan. In addition, from the period of time that the Plan commenced leading up to the Plan Meetings the business deteriorated which meant that delivering the Plan was going to be more challenging to deliver successfully. 

Why did HMRC vote against the Plan?

In 2023 HMRC released guidance for companies seeking to restructure tax debts using a Restructuring Plan. It can be found here:

https://www.gov.uk/guidance/using-debt-management-schemes-to-restructure-a-companys-finances

In our Explanatory Statement we addressed each of HMRC's guidance but as noted above HMRC still voted against the Plan. After voting against it, HMRC requested further information about the Plan, but ultimately offered no explanation for their position, and did not enter into any discussions about it, nor around parameters for future Plans.

Lessons Learned

This case shows that Lite Restructuring Plans are a realistic restructuring option for small scale businesses across the UK. There has been market commentary that the costs for a Plan mean it is not practical for SME's. That is not accurate. The legal costs incurred are broadly similar to pre-pack administration and there would be no ongoing costs for dealing with the Administration. Overall professional costs in our view may be considered comparable to a connected party pre-pack administration. Costs are therefore not a barrier to Lite Restructuring Plans.

The role of the Court Reporter in Scotland needs considered and once there have been more Restructuring Plans we suspect that the judiciary will direct that the Reporters role will be simplified or not required.

We would encourage creditors to engage with the process both before the Plan is formally launched and after the convening hearing. This will allow businesses to shape the Plan to make sure everyone believes it is fair in the circumstances. 

Restructuring Plans are undoubtedly an excellent opportunity to save businesses which is why we have seen other jurisdictions adopting similar measures. The legislation was drafted to be available to companies, regardless of size.  It is therefore for the restructuring profession to pick up the challenge of making 'Lite' Restructuring Plans cost-effective and look for wider opportunities to use them.